PSE to allow “Short Selling” of stocks in 2018

Traders and investors will finally be allowed to “short” stocks, Philippine Stock Exchange (PSE) CEO Ramon Monzon announced during an interview with Bloomberg TV Philippines.

Mr. Monzon explained that the PSE is currently finalizing the draft rules that will allow short selling. This policy could be implemented as early as the 1st quarter of 2018, Mr. Monzon added.

What is “Short Selling”?

Short Selling is the act of selling a stock that is not owned by the investor and is usually done because of an expectation that the stock price will drop.

If indeed the stock price fell, the investor — who does not own the stock — makes a profit. But if the stock price rose, the investor could incur a loss.

Here’s a more detailed explanation of how “Short Selling”, also called “Shorting” of stocks, is done.

How Short Selling is done

Let’s assume that X Company’s stock is currently trading at P100.00 per share. You believe its stock price will decline in the coming weeks, perhaps due to dismal corporate performance or a generally pessimistic outlook in the market.

You do not own the stock, which is why you cannot sell it. What you do instead is “borrow” the stock from your broker. These stocks may come from the broker’s own inventory or from another client of the broker who owns the stock.

To make our example simpler, let’s say you will just borrow one (1) stock of X. Disregarding any fees and commissions, you can sell this borrowed stock at its current market price of P100.00. You’ll then receive P100.00 from the sale of the borrowed stock.

How to Cover your Short Selling Position

Take note, though, that you sold a stock which you do not own. Sometime in the future, you will have to return this stock to your broker — and this act is known as “closing” or “covering” the short position.

Assuming your bet was correct and the stock price indeed fell to P90.00 per share, what you can do now is buy the stock at a lower price. This enables you to “cover” your short position, meaning, you can now return the stock you owe your broker by buying the stock in the open market.

How to Profit in Short Selling

So how do you make money through short selling?

Remember how much you got when you sold Stock X? One hundred pesos (P100.00).

Now, to return the borrowed stock, you can simply buy the stock in the open market. For how much? At its current price of P90.00.

So you sold the stock for P100.00 and paid only P90.00 to re-acquire it. You’ve closed your short position with a profit of P10.00! (Again, disregarding fees and commissions).

That’s how money is made through short selling. You’ve booked a profit even if you did not own the stock.

You probably now have an idea why some people would do short selling transactions. This is because it’s possible to earn profits even when stock prices are declining or when the market is in a bearish period. Some traders also sell short as an alternative trading strategy or to hedge possible losses from uncertain price fluctuations in the future.

Losses in Short Sales

Of course, shorting stocks is not entirely risk-free.

If your bet was wrong and the stock price, instead of going down, rose to P120.00, you will have to close the position by buying the stock at P120.00.

Using the same example earlier, since you sold it for only P100.00 and you’d buy it at P120.00 to close your position, you now incurred a loss of P20.00.

Now that you’ve understood what it is, are you in favor of short selling transactions in the PSE? Let us know by voting in our poll now!

Are you in favor of short selling in the Philippine Stock Exchange (PSE)?

13 thoughts on“PSE to allow “Short Selling” of stocks in 2018”

I still do not agree considering that there is not enough spread as to indirect influence of the market. most players are still big players, i.e. holds about 3/4ths of the stock market transaction, hence, it is easy for them to make their play according to their goals and or objective, and in the process burn anyone who would be taken for a ride.

If we have enough market players in such a way that no one can really create an influence by themselves, then I am all for hedging and other derivates (i.e. speculative play), otherwise, this is pure greed being seen by market players. REMEMBER, we individual/ retail players plus local trading firms, are not even at least 40% of those foreign and big trading firms. we will all be burned if we continue with this proposal AT THIS TIME!

1. ‘Borrow’ a number of stocks from broker’s inventory. (no actual stocks position exists) 2. Broker sells stocks at the current Price. (?) 3. Broker deposits the proceeds to my account 4. If price goes down, I will buy the stocks. (actual position occurs) 5. Then I will return the position to my broker’s inventory.

Let me share what I understand. 1st: If I choose to short XYZ Company, depending on my broker if they have an inventory of XYZ’s shares that is allowed to be shorted.

2nd: If so, I will borrow an amount of shares. Lets say I will borrow 1000 shares to my broker at its actual market price.

3rd: If my plans and calculations are correct that XYZ Company’s price will go down. I will make a profit. So if I borrow 1000 shares at 10php per share and it went down to and covered it at 8php per share my profits will be 2php per share. Leaving me from an investment of 10,000php to a profit of 2000php(exclusive of fees and tax).

4th: But when the price went up to 12php from 10php per share, i’ll be losing 2,000php.

Conclusion: In shorting stocks its obvious that we are finding unperformed or losing companies that has the potential to go down its stock price. Not the conventional plans that we should find a good performed company so we can ride its uptrend price.

Note: What I wrote here are just my understanding on the subject. If you have any comments, whether i’m wrong or not please let me know.

Yes, that is right. If the market goes up you will earn. If the market goes down you also earn by shorting a stock. So either way you will earn. Isn’t it beautiful? Is it risky? Yes, but the only tool that you need is Technical Analysis, data will not lie. If the trending is down then is down, if it is up, then it’s up. Would you short sell if the Moving Average goes up? No! Simple!

I believe before PSE implement short selling, we should implement fix transaction fee per trade… selling securities here in PH is cost a lot.. it’s like paying 1.2% of total investment per trade. meaning.. is you short sell you need to make sure it will drop more than 4-6% before you say it is profitable or you just going to pay a lot specially if you fail on your short.

There should be a limit based on the size of the portfolio and the number of shares you can borrow shall depend on the liquidity and volatility of the stocks you want to sell short. Example: you have 1000 shares of NOW, placed it in margin account and borrow x2 (2000 shares of NOW). You will now have a total of 3000 shares that you can short sell for example at a price of 10/sh, then you will now have 30k in cash in your margin account. If price of NOW become 15/sh, you will be required to liquidate your short position, hence buy 2000 shares at 15/sh then pay the 2000 shares loan. In effect you will have a 100% loss (losing all the 1000 shares you originally placed in margin account). To avoid this happening, there should be stop limit orders so that the trader can limit his/her loss.